Pin Me

Taxpayer Knowledge: Understanding IRS Rules on Distributions

written by: •edited by: Rebecca Scudder•updated: 5/11/2011

Taxpayers who took distributions from their IRA during 2010 may be wondering what is the tax rate on IRA withdrawals in 2011. The rules are complicated and apply to taxpayers differently depending on the type of IRA distribution that is taken. It is important to understand how the rules work.

  • slide 1 of 3

    IRA Withdrawals May Not Be Taxed The Same Way

    IRS If you are a taxpayer who took a distribution during 2010, you may be wondering how the tax rate on IRA withdrawals in 2011 will impact it. The Internal Revenue Service has specific rules regarding IRA withdrawals. The tax information that is required to determine tax rates is important and each taxpayer should review all information carefully and if they have a question speak with a qualified tax preparer or a tax attorney for assistance. There are exceptions to early withdrawal tax penalties including:

    Special Cases

    Age matters - IRA withdrawals are typically allowed once a taxpayer reaches the age of 59 1/2. Withdrawals that are made by taxpayers younger than this are typically subjected to an automatic 10% tax penalty. There are some exceptions to this penalty including;

    Medical expenses - taxpayers who have had unusual medical expenses may be allowed to withdraw funds from their IRA to pay those expenses provided they are 7.5% of their gross income or more;

    Tax expenses - taxpayers who are facing a tax levy may be eligible to have part of their IRA distributed tax free to pay that levy;

    First time homeowner - taxpayers who are first time home buyers or builders may take a distribution of up to $10,000 from their IRA for the purchase or construction of their home tax free;

    Rollover to another plan - taxpayers who are interested in rolling their IRA funds into another plan may also be exempt from paying additional taxes on the distribution. There are specific rules that apply to this type of withdrawal;

    Taxpayers who are disabled - in most cases, a taxpayer who is disabled will be exempt from paying additional taxes on their IRA distribution.

    There are other exclusions to payment of taxes on IRA withdrawals that those who do not have the proper tax information would be unaware of. It is important to understand these exclusions completely when filing taxes.

  • slide 2 of 3

    Different Distributions Mean Different Tax Rules

    Tax issues IRS tax rates on IRA withdrawals in 2011 are challenging for many taxpayers to deal with. In some cases, the distribution may be made tax free. For others, the tax rate may be 10% or may even be 25%, depending on the reasons for the distribution, and numerous other factors which may include (but may not be limited to) the taxpayer's tax bracket.

    Early Distributions

    For a taxpayer who takes an early distribution from an IRA account in 2011, the distribution will be taxed at 25%, provided the IRA has not "seasoned" for two years. Taxpayers who have taken a non-qualified distribution will be required to file Form 5329 if the box on the 1099 form does not specify code "I", which would show amounts subject to 10% taxes;

    These rules apply mainly to a SIMPLE IRA, not to all tax qualified plans. Each plan may have a different requirement and it is important that a taxpayer obtain the proper tax information to ensure that they have filed properly. Tax rates in IRA withdrawals are generally 10% on any distribution that is not excluded based on the rules spelled out by the Internal Revenue Service. Those who have inherited an IRA plan because they were a beneficiary may also be subject to specific tax requirements.

  • slide 3 of 3

    Resources

    Sources

    Internal Revenue Service

    1. Publication 590 Tax Penalties for IRA Withdrawals: http://www.irs.gov/publications/p590/ch01.html#en_US_2010_publink1000230799
    2. Retirement Topics: http://www.irs.gov/retirement/participant/article/0,,id=211440,00.html
    3. Pensions/Annuities/Retirement Plans http://www.irs.gov/faqs/content/0,,id=199909,00.html

    Image Credits:






© Copyright 2016 brighthub.com.